The Five Pillars Of Every Commercial Mortgage

Any prospective commercial property owner should make sure that they are as well informed as possible before they decide to take the plunge and invest large sums of money. Commercial mortgages are different from regular home loans; they are designed to help you raise the capital you need to purchase offices, shops, warehouses, factories or other commercial premises.

There are of course some similarities between commercial and residential mortgages, all mortgages will have the same core DNA - a lender will lend you the capital to buy a property and use the same property for security if you cannot keep up with repayments. Yet the differences and complexities between the two are wide, out guide below highlights the five major essentials to be aware of when securing a commercial mortgage.

1. Deposits for commercial mortgages are higher than for normal home loans: When you decide to purchase a residential property, you will normally have to put down a deposit of at least 10-15 per cent of the asking price. Depending on how risk averse the lender is, will determine whether or not they will require higher deposits, particularly to secure the very best interest rates. Lenders may take into account all manner of personal circumstances before they calculate the size of deposit they will require.

When you are taking out a commercial mortgage, the rules are different. It is quite common for a buyer to have to offer between 30 and 40 per cent of the purchase price, this is a reflection of the increased risk that the banks feels it is being exposed to (as we all know, banks are increasingly risk averse these days). Investing in commercial property may therefore require you to commit a significant amount of your own cash.

2. You may need to provide a personal guarantee: Sometimes cash deposits are not enough to completely satisfy a commercial lender. Mortgages for business purposes are available to individuals, partnerships and to companies. If you are looking to borrow in the name of your business (for example to buy office space) it is possible that the directors of the company will have to offer 'personal guarantees' to a lender. This inevitably results in directors being required to step in and make payments to the commercial mortgage should the business fail to keep up the payments, and often placing their homes up as surety on the loan.

3. Duty Free: If you decide to take out a commercial mortgage, HM Revenue and Customs (HMRC) will treat the interest payments on the capital of the loan as an allowable expense for taxation purposes. Therefore, your company can reclaim the expense of interest payments on a commercial mortgage as a tax deduction when they are preparing the end of year company accounts or the Self Assessment tax return.

4. Lower Rates: Anyone how has ever run up a credit card will know that secured loans are cheaper than unsecured ones. Borrowing for business purposes is always cheaper if it is being done through a commercial mortgage. One key advantage of the commercial mortgage is the interest rate. They are normally charged ata a rate lower than other forms of credit. This is because the lender has the security of the property as collateral.

With this in mind, it's not just to buy property that commercial mortgages are used for; they can be the most cost effective option for debt consolidation to reign in high interest rates on these debts.

5. Commercial mortgages tend to be structured differently to residential mortgages: Though there are some key similarities between residential and commercial mortgages, the loans are actually created in a different way. For example, you can rarely take a commercial loan on a purely 'interest only' basis. It represents too high a risk for a bank. Whilst a lender, sympathetic to you in financially difficult times, may allow you to make interest only payments for a while, the loan will normally have to be repaid on a capital and interest basis eventually.

Also, many commercial mortgages are set up on a 'quarterly payment' basis, reflecting the business year. This means that interest payments are calculated every three months rather than on a normal monthly basis.

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